Economic Chaos & Venezuela's Inevitable Dollarization

To paraphrase Henry Ford, you can have any car you like as long as you pay in US dollars.

The ultimate insult to any socialist Latin American banana republic is to mismanage the economy to the point that it effectively becomes a "dollarized" one. That is, the "official" currency is regarded as practically worthless by the vast majority of the nation's citizens. As a result, the almighty US dollar becomes the de facto tender in the country. Of course, we must distinguish between sponsored dollarization when a state provides official sanction to dollarization and unsponsored dollarization in which a state does not provide official sanction but it nevertheless happens. For the former, think of Ecuador whose socialist nutter president Rafael Correa is (surprise!) nevertheless attempting to introduce a national currency years after the country adopted the US dollar as its own. Call it the sucre punch.

For the latter, well, we have modern-day Venezuela--economic hell on earth:

It's still possible to buy a
gleaming Ford truck in Venezuela, rent a chic apartment in Caracas, and
snag an American Airlines flight to Miami. Just not in the country's
official currency. As
the South American nation spirals into economic chaos, an increasing
number of products are not only figuratively out of the reach of average
consumers, but literally cannot be purchased in Venezuelan bolivars,
which fell into a tailspin on the black market last week.

Businesses
and individuals are turning to dollars even as the anti-American
rhetoric of the socialist administration grows more strident. It's a
shift that's allowing parts of the economy to limp along despite a cash
crunch and the world's highest inflation. But it could put some goods
further out of reach of the working class, whose well-being has been the
focal point of the country's 16-year-old socialist revolution.

The
latest sign of an emerging dual-currency system came earlier this month
when Ford Motor Co. union officials said the company had reached a deal
with officials to sell trucks and sports utility vehicles in dollars
only.

A few
weeks earlier, American Airlines announced that it had stopped
accepting bolivars for any of its 19 weekly flights out of Venezuela.
Customers must now use a foreign credit card to buy the tickets online.
Virtually all other foreign carriers have made the same switch with the
government's consent, according to the Venezuela Airlines Association.

The obvious raison d'etre behind this shift is the increasing worthlessness of the Venezuelan bolivar. Despite the constant anti-American rhetoric, what's interesting is the unspoken acceptance of dollarization to help defuse popular grievances against Maduro's economic mismanagement:

Driving the shift is the
crumbling value of the bolivar, which has lost more than half its value
this year, plunging to 400 per dollar on the free market as Venezuelans
scramble to convert their savings into a more stable currency.
Desperate, people are selling bolivars for a rate 60 times weaker than
the strongest of country's three official exchange rates.

It's
a politically uncomfortable situation for President Nicolas Maduro, who
regularly leads chants of "gringo go home" and says currency
speculation is one of the main tools used by enemies to try to sow chaos
and force him from power.

It's not just businesses chasing
greenbacks. Real estate contracts are still drafted in bolivars to
satisfy a requirement imposed by late President Hugo Chavez, but in
upscale neighborhoods most owners operate outside the law and sell and
rent in dollars only. A group of realtors in tony eastern Caracas has
established a password-protected website for listings in dollar prices.

Analysts
say the administration likely sees a limited dollarization as the only
way to prevent multinationals from leaving the county altogether, as
Clorox did last year, citing problems brought about by decade-old
currency controls, supply shortages and inflation that hit 68 percent
last year, and economists believe is now well into the triple digits.

The Yanquis have won, Maduro. The ultimate humiliation is of your own doing.